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Opinions of Saturday, 10 July 2010

Columnist: Adam, Mohammed Amin

Kosmos Deal And The National Interest

Kosmos Deal And The National Interest: - Slippery Steps Of A New Petro-State

Mohammed Amin Adam


If there has been any contractual agreement in the petroleum sector that has generated so much interest in Ghana and abroad, it is the Kosmos agreement. The decision by Kosmos Ghana to offload its stake in the Jubilee field to Exxon Mobil has added to the controversy given that the Government of Ghana is reportedly not in support of the deal.

The only reasons that are officially known so far for government’s position on the Kosmos deal is the reported violation of the Kosmos Agreement by Kosmos Ghana through the opening of the data room for Exxon and other petroleum companies and the failure to give other parties in the jubilee license the right of pre-emption. This in the view of GNPC compromises the commercial interest of the national oil company.

There has also been the issue of the national interest being undermined if the deal is allowed. In this article, I have attempted an analysis of the kosmos deal, contract transparency and the national interest.


Kosmos Ghana holds significant interests in the Jubilee fields. The composition of stake-holding is for the West Cape Three Points:- Anadarko-30.875%; Kosmos Energy- 30.875%; Tullow-22.896%; Sabre Oil &Gas-1.854%; E.O. Group(a Ghanaian private interest)-3.5% and the GNPC-10%; and for the Deepwater Tano:- Anadarko-18%; Tullow-49.955; Kosmos Energy-18%; Sabre Oil & Gas- 4.055 and the GNPC-10%.
Therefore any decision by Kosmos would undoubtedly raise questions. Why has Kosmos chosen to sell its stake? Why does it choose for Ghana who buys the stake?
There are two probable reasons why Kosmos chose to sell its stake. First, the controversies surrounding the defects in the agreement and the ‘supper-attractive’ terms given to Kosmos relative to other Exploration and Production (E&P) companies were certainly going to be re-examined and the possibility for renegotiation was going to be supported by majority of Ghanaians especially against the background that most Ghanaians saw Ghana’s 10% participating interest as a bad deal.
Second, there have been allegations of corruption in the deal involving Kosmos and the Ghanaian EO Group and the fear that the new government of NDC was going to take issues with the agreement was also expected.
However, much as there may be strong arguments to justify these reasons, it is also a fact that Kosmos has a tradition of limiting its operations to explorations. Being a small company with modern exploration technology, Kosmos in all its operations so far has always sold its blocks after successful commercial discoveries of oil. Given that this is the reason for offloading its stake in Jubilee, what right has Kosmos to decide to impose a buyer on the other partners without giving them the first chance to refuse? But what commercial sense would it also make for Kosmos to accept a buyer imposed on it by the other parties especially the GNPC which holds a lesser stake than Kosmos?
So far the other parties in the license including Tullow, Anadarko, Sabre and the EO Group have remained silent over the deal which has created the perception that government is applying its sovereign power of the state to scuffle a commercial transaction on an agreement dully negotiated and approved by Parliament.

But where does the national interest stand in this controversy? The GNPC could serve the national interest in different ways. First, it will make more meaning to Ghanaians if the GNPC is exercising its right of pre-emption to increase the state’s participation to more than 40%. It must also be noted nonetheless that the state’s participation in production is not a carried interest, hence an increase in such participation carries with it heavy responsibility in the event of a cash call.

The GNPC does not have the US$4 billion, the equivalent of our national budget, demanded by Kosmos. Financing this transaction wholly or by joint-venture therefore raises concerns of how the GNPC as a state company could finance its current and future cash calls and on what terms without burdening Ghanaians.
Second, if the GNPC intends to buy the stake and resell to make profits without burdening the people of Ghana, such an arrangement will also be appropriate for serving our national interest. However, the choice of a company must be based on high technology, high oil recovery, environmental and social sustainability. This is more important in view of the environmental damage caused by the current oil spill in the Gulf of Mexico. If the Exxons and the BPs cannot fully absolve themselves of environmental damage during oil production, I wonder the pedigree of the company that will be favoured by Ghana. In fact, BP spent over US$23 billion with high technology to stop the spill in the Gulf of Mexico without success, an amount more than the US$20 billion expected as revenues to the country from the Jubilee operations for the next 20 years. Therefore any decision on a company eventually chosen by Ghana to buy the Kosmos stake may have serious implications for expected revenues, the life span of the field and the environment.
The most worrying issue now is how effectively we have articulated the national interest so far in the Kosmos-Ghana impasse. Some of our citizens and of other countries think that Kosmos is being ‘victimized’ in the name of national interest. Our government needs to change this trend if Ghana is to continue to enjoy its position as the most preferred investment destination in the sub-region. It is therefore important for government to come clear on what the national interest is so that Ghanaians can rally around it. This is not the time we need to be divided. Certainly, the breach of the agreement by Kosmos is an important trigger for concern but it does not explain how an opposition to the deal protects our national interest especially since the other parties in the license equally qualify for the right of pre-emption.

In the Kosmos Agreement like all the petroleum agreements signed with the government of Ghana, there are extensive provisions of confidentiality clauses binding all parties to the agreement. A violation of these provisions by any party is a breach of the agreement which must be penalized. In this case, Kosmos’s disclosure of confidential data is inappropriate and cannot be swept under carpet.
However, with Ghana’s credentials as a democratic success and the desire to pass Freedom of Information legislation, over-reliance on the confidentiality provision as reason to oppose the Kosmos deal is a serious slap in the face of Ghana’s efforts at building a transparent society.
The question that will continue to border the minds of many Ghanaians is what constitutes confidential information? In the extractive industry, confidential information refers to information that is ‘commercially sensitive’ to prevent competitors from having undue advantage.
Commercial sensitivity is however a relative term whiles the right of its determination and declaration is not easily comprehensive. In the Kosmos agreement, what is commercially sensitive is determined by all the parties to the agreement including the government. Government is therefore condoning non-disclosures by private companies pursuing commercial interests. This cannot be described as national interest. For instance, it is not in our interest to hold confidential as the agreement does, the true reserve levels in oil fields, the field development plans, spill response plans, well data and many other information that are relevant for effective public scrutiny of the oil industry.
Whiles any attempt to undermine the deal may not necessarily serve our national interest and yet paint our country as not respecting international agreements if not handled well, it is equally important to note that there are more serious issues in the agreement itself which should be re-examined if we are to protect the interest of Ghana. Opposition to the deal should not be based on who Kosmos sells its stake to especially if Ghana cannot finance a takeover, but rather on how we can exploit its breach of the agreement to renegotiate the terms that are likely to reduce the benefits of Ghana from the Jubilee operations. This will not be peculiar to Ghana as many mineral rich countries are renegotiating their contracts. Although the terms of the agreement are guaranteed under stabilization clauses, the breach of the agreement by Kosmos compromises the strength of the stability of those terms which should therefore open the door for renegotiating some of the defective terms elaborated as follows.

I. The Stabilization Clause
The country is hoodwinked to certain stabilization provisions which may not seek the interest of the state. Article 26.2 of the agreement mandates the state ‘to support this agreement and shall make no action which prevents or impedes the due exercise and performance of the rights and obligations of the parties hereunder’. The state further ‘guarantees the contractor the stability of the terms and conditions of this agreement as well as the fiscal and contractual framework hereof specifically including those terms and conditions and that framework that are based upon or subject to the provisions of the laws and regulations of Ghana (and any interpretations thereof) including without limitation the Petroleum Income Tax Law, the Petroleum Law, the GNPC Law and those other laws, regulations and decrees that are applicable hereto’.
From the stability clause, it is clear that the stability of the terms is subject to the provisions of the laws and regulations of Ghana. Therefore, by violating the laws of the country, Kosmos undermines the stability of the agreement.
Stabilization clauses are not in the interest of the country especially when it favours the company at the expense of the state. For instance, in the said agreement, the state has been incapacitated to act even under circumstances which require in particular, changes to the fiscal framework. However, the contractor is allowed to make proposals for changes to the fiscal framework as provided for in Article 8.18 of the agreement.
Whiles it is good that any changes or amendments require the ‘execution and delivery of a written agreement by the parties’ as in Article 26.3, it should be possible for all parties including the state to benefit from these provisions. The limitation to the contractor of the right to propose changes to the fiscal framework further violates Article 26.7 which makes the rights and obligations of all parties proportional. Certainly, the principle of proportionality breaks down when one party is allowed to do something the other party cannot do.
II. State Participation
The state participation in the Kosmos agreement is 10% carried interest. This compares to the 15% carried interest in the Vanco Agreement on the Cape Three Points deepwater block which encompasses an area of 5,146 sq km (1,987 sq mi) in water depths ranging from 200 to 3,000 m (656 to 9,843 ft) in the Tano basin. The state has the option to acquire up to an additional 5% in any commercial discovery unlike the Kosmos agreement which allows additional paid interest of 3.5%.

III. Production sharing
Clearly, the Kosmos agreement is deepwater offshore license and therefore the royalty rate is 5%. The royalty is not bad considering the fact that deep water exploration in most countries such as Angola, Equatorial Guinea, Nigeria and Cameroon attract zero royalty in their fiscal regimes. Deep water explorations are very difficult and expensive and Ghana may lose its attraction to investors if we continue to hold on to such levels of royalties. It is important to negotiate for more participating interest in place of royalties.
IV. Crude Oil Pricing
Crude oil pricing under the agreement is quite general in terms of crude benchmarking. The agreements in most parts refer to the weighted average market price of crude as the prescribed price for any transaction between the contractor and the state.
There are two important indicators of crude pricing in the agreement. The first is the use of the weighted average price at the time of oil delivery. The second is to use the reference price of crudes with similar quality as that produced in Ghana.
The first indicator is quite positive and prevents the state from locking itself in specific prices and margins. Therefore both the state and the company share the risk of price volatility. That is both parties gain or lose if crude prices rise or fall.
The second indicator which captures quality concerns is appropriate but it is also important to state that not all crudes with similar qualities have the same price. There are always marginal differences which translate into substantial revenues depending on production levels. For instance both the West Texas Intermediate (WTI) and Brent crude are light crudes with considerably high degrees of API (an index measure of crude quality), but available evidence suggests that the WTI price is most of the time higher than Brent price. The agreement therefore fell short of incorporating a clause to use the highest market price among similar crudes at the time of any transaction between government and the contractor as the benchmark price. This certainly will bring more value to the country than the current provisions on crude oil pricing.
V. Foreign Exchange Transactions
Under the agreement, Kosmos can transfer its profits and money in foreign currency without restrictions. This is in line with the Ghana Investment Promotion Centre Act 478. But petroleum transactions are usually very expensive and may involve inflow and outflow of huge foreign currencies and may therefore require different treatment. Such unrestricted transfers of foreign currency may significantly erode the value of our currency. It may also promote the incidence of capital flight from the economy.
VI. Oil backed Loans
There are three provisions for oil backed loans in the agreement. The first is in respect of services provided by contractor in GNPC’s sole risk operations for which GNPC is to pay for the cost of the services. The second concerns the participating interest of GNPC. If GNPC fails to pay for its participating interest in respect of any production or part of it, the contractor shall recover the default amount plus interest from GNPC from its share of oil at the prescribed weighted average market price. The third is in respect of contractor’s supply to the domestic market if the government share is insufficient for the domestic market. In this case, the contractor is entitled to recover the default amount from the government share of oil if the government fails to pay within 30 days.
However, oil backed loans are prohibited under the current proposals by government for petroleum revenue management which may eventually become a law. The agreement could therefore violate the petroleum revenue management law if the prohibition of oil-backed loans in the proposals is not reviewed.
Government should therefore renegotiate the recovery of the default amount in respect of crude oil supplies to the domestic market. When government does not have the capacity to pay for crude oil balance supplied by the company, it should allow the private sector to take crude supplies from the company in line with our petroleum deregulation policy. This will ensure that the country does not experience fuel shortages at any time.

The controversy over the Kosmos deal no doubt has taken partisan lines. Our ability to confront its repercussions will therefore be limited. In the face of alleged ‘intimidation’ of government officials by the United States including a suspension of US Energy Technical Support to Ghana, the least Ghanaians could do is unite under a common understanding that the Kosmos deal is between a foreign company and our country. But government has to provide the leadership by explaining to Ghanaians what national interest we need to protect in order to disabuse the minds of those who believe that Kosmos is being ‘victimized’ by the government of Ghana in spite of its ground-breaking discovery of oil whose exploitation is going to redefine the economic fortunes of the country.
It is also true that any slippery steps we take as a new oil producing country may affect upstream investments and future oil discoveries considering that Ghana is considered a high risk exploration zone.
In taking a final decision on the deal, we should and diligently analyse the various options available to us. That is whether stopping the deal between Kosmos and Exxon and buying the stake or completely using the breach of the agreement by Kosmos to renegotiate defective terms. Certainly not all the options will serve our national interest and some will undoubtedly be more expensive than others. Renegotiation is the least expensive but also beneficial.